Why discussions of government benefits are so wrong

Earlier this week, The Heritage Foundation released a report purporting to detail the costs of granting citizenship to undocumented immigrants. This report set off a flurry of wonky debates, with both conservative and liberal commentators criticizing the methodology and assumptions used by the report’s authors.

The discussion that sprung up around this report followed the same script used in basically all of the wonk debates about government benefits and individual economic contribution. In such debates, everyone accepts the underlying assumption that we can quantify government benefits by looking at welfare payments, and that we can quantify individual economic contributions by looking at pre-tax incomes. These working assumptions make it easy to fill out spreadsheets and produce reports, but they have no basis in reality.

Government Benefits
For the wonk class, figuring out how much income an individual or family receives from government policies is easy: just add up all of the cash benefits, tax credits, and social insurance they receive. Conservatives in particular like this approach because it conveniently includes all of the programs they want to drastically scale back or get rid of altogether. Occasionally, a liberal wonk will bring up the benefits of roads and other public goods, but that is about as far as this discussion ever stretches.

But the income that comes through these overt channels is miniscule compared to the income individuals receive as a consequence of other government policies. Institutions like property ownership, contract rights, and law enforcement set the stage for all of the income and ownership that exists in our society. These are intentional government policies. They do not have to exist, and as development economists point out, they certainly don’t exist everywhere. To put it succinctly: the property-owning market economy is the biggest government welfare program of all time.

If we are going to calculate how much each individual benefits from government policies, we should include literally all government policies, not a cherry-picked subset of them that serve the poor and vulnerable. We should ask ourselves: how much money would Bill Gates have if it were not for copyright and patent law? How much money would rich investors have if we did not have limited-liability corporations or securities laws? How much would anybody functionally own if we repealed private property laws altogether, creating some sort of ownership free-for-all?

At their root, all incomes are determined by our politically-constructed economic institutions. Wonks in particular like to forget this, but their amnesia about that fact makes it no less true. Wisdom about how much income is derived from government policies will not come from a budget spreadsheet, but from imagining what incomes would be in a world that was truly free of governing institutions altogether. It is impossible to say with certainty what that would look like, but I suspect philosopher Thomas Hobbes was pretty close when he argued that lives in such a hypothetical world would be “poor, nasty, brutish, and short.” Against that baseline, we are all huge moochers.

Economic Contribution
Government policies do not create economic production by themselves of course. Individuals have to carry out economic activity. But this brute fact does not mean it is easy to figure out what any given individual’s economic contribution is. The wonky crowd — especially conservatives — tend to treat pre-tax income as a measurement of an individual’s economic contribution. The assumptions underlying this discussion are just as untenable as those underlying the government benefits discussion.

To start, government policy decisions end up baked into incomes well before taxation begins. Laws governing intellectual property, minimum wages, and unions, for instance, can shift around income in ways that are not necessarily related to economic contribution. These kinds of predistributive measures show how empty the focus on pre-tax incomes really is.

Beyond that, what you count as an economic contribution is a highly ideological affair. Does rental income derive from an economic contribution? Classical economists like Adam Smith don’t think so. Do dividends and other capital income derive from an economic contribution? Nobel-prize winning economist Amartya Sen doesn’t think so, not to mention the Marxists. These disagreements will not be resolved because they turn, not on empirical facts in the world, but on ideological notions of what an economic contribution really is.

Even if we were to grant that all of the above are actually economic contributions that deserve an income, a great portion of our economic product is rightly understood as derivative of centuries of accumulated technology and other related factors. Nobody alive today invented algebra or electricity, but all of our incomes are much higher because of those things. These gifts from the past deliver to all of us varying amounts of extra income that have nothing to do with our individual economic contributions, whether that contribution is capital, labor, or land.

All of this is to say that the simplifications the chattering classes use to talk about government benefits and economic contributions are wildly off the mark. Their treatment of government benefits focuses narrowly on so-called welfare programs while ignoring the major governmental institutions that distribute almost all of the income in society. Their treatment of economic contribution fetishizes pre-tax incomes even though those incomes derive from many things that have absolutely nothing to do with individual contribution. Ignoring this reality makes it easier to cobble together crisp numbers, but simultaneously renders those numbers meaningless.